Making a gift into a discretionary trust is a chargeable lifetime transfer as per s2 IHTA 1984. The inheritance tax nil rate band available is £325,000 so only if you have already used up your nil rate band (NRB) in the last 7 years would inheritance tax would be payable – at 20% on the transfer of value into the trust.
A gift of cash from one individual to another is a potentially exempt transfer (PET) within s3A IHTA 1984 and does not utilize your nil rate band. Generally, these will only be within the scope of inheritance tax if the donor does not survive 7 years after making this gift making this a “failed PET”.
If there is a failed PET, then after allowing available annual exemptions (£3,000 pa) your available NRB would first be used against the failed PETs as the chargeable transfers are calculated in date order – s7 IHTA 1984. If there is only a single nil rate band available (I.e. there is no transferrable spousal/civil partner NRB), then this would mean part or all of the transfer to the trust would become chargeable depending on how much of the NRB has been used against the failed PETs.
At present, the earlier gift you made to your grandchild of £325,000 in cash was a PET so this would not affect the availability of your current NRB. Therefore, you do not have to pay any inheritance tax settling £100,000 into trust proving of course that you have not made any other chargeable transfers in the last 7 years prior to this.
Please share this article with your clients
Our team of expert consultants have a wealth of experience and can also provide a written consultancy service to support your practice, like having your very own tax and VAT department.
Why not see what My VIP Tax Team can do for your practice, call 0844 892 0251 or firstname.lastname@example.org to find out more.